There has been a heap of data and newsflow to digest but the net result is only small changes to financial asset prices, with the market focused on the US employment report at the end of the week. US equities are flat, the US 10-year rate has traded a tight range and the USD is flat. Within the mix, the NZD has slightly underperformed, drifting down towards 0.7250.
US equities opened on a positive note and the US 10-year rate was trading near its high for the day around 1.635% before risk sentiment weakened after the ISM reported a soft employment component. It highlighted the sensitivity of the market to the US labour market situation as we keenly await Friday’s non-farm payrolls report, where expectations are spread between a wide range of 300k and 1000k for the April reading, with the consensus centred around 650k. The S&P500 is currently flat, while the 10-year rate has pushed back down to 1.61%, little change from the NZ close.
Earlier in the session, final readings for the Markit manufacturing PMIs across the Euro area were revised slightly higher from the flash estimates, with the aggregate up to a record high of 63.1, consistent with a strong recovery for the region. The common theme was output and inventories held back by capacity constraints and as deliveries from suppliers “deteriorated at a severe and unprecedented rate”, leading to a substantial rise in average input costs, “with the rate of inflation hitting an unprecedented level”.
The US ISM manufacturing report was similar, the message being the same as above, and with the headline index nudging higher to 61.2. The key employment gauge notably fell to a six-month low of 50.9, reflecting the difficulty in hiring and retaining labour, with the spokesman for the survey pointing to the enhanced unemployment benefits reducing labour supply and once they expire the labour market will be much more in sync with demand and supply.
In Fed-speak, Governor Quarles, who was quoted last week as suggesting that it might be apt to discuss plans to taper bond purchases over the coming months in a highly qualified statement, was on the wires again overnight. He noted some benefit in reducing the Fed balance sheet “in the future” But he also noted that there was a significant way to go to full employment and that monetary policy tools shouldn’t be used to address supply chain disruptions, adding the “question is whether they last long enough to affect inflation expectations”. Governor Brainard noted the Fed was still “far from our goals” with risks on both sides and called for the Fed to be “steady and transparent” in its policy approach “while remaining attentive to the evolution of the data and prepared to adjust as needed”.
In other economic releases, Euro area annual CPI inflation hit 2% for the first time since 2018 but the core increase was much lower at 0.9%, as expected. Canada GDP in Q1 was weaker than expected but was still up a strong annualised 5.6%, fuelled by a record contribution from residential investment.
OPEC+ agreed to stick to the plan to hike output in July, but the market was left guessing about what will happen after July, with the Saudi Arabia keeping its options open about whether to raise supply further as demand recovers. Brent crude is up over 1½% for the day, getting within a few cents of the March high above USD71, now trading about USD70.50.
The GDT dairy auction price index fell by 0.9%, essentially maintaining the recent very high level. In the mix were 0.5% falls in whole milk and skim milk powder prices, a chunky 5.4% fall in butter and a 0.5% rise in cheddar. The result doesn’t have any implication for the milk price payout, for which recently Fonterra set a recent high opening mid-point for FY22 of $8 per kg/milk solids.
In currency markets, the USD is flat and changes for the majors have been modest. GBP has underperformed, trading down to 1.4160 with a question mark on the further plans to reopen the economy as a new infectious wave of COVID19 spreads in some UK regions.
The NZD has drifted down towards 0.7250, further unwinding the rally seen after last week’s MPS, while the AUD has pushed higher to 0.7760, taking the NZD/AUD cross back below 0.9350. Iron ore prices have recovered back above the USD200 mark despite China’s best efforts to rein in commodity prices.
Yesterday, Australia’s current account surplus rose to a record high of $18.3b in Q1, driven by stronger commodity prices. Furthermore, the net balance of indicators on net exports, inventories and public spending that feed into Q1 GDP was much stronger than expected, seeing some late upward revisions to consensus estimates for that release later today, now up to 1.5% q/q.
The RBA policy meeting came and went with little fresh insight about its intentions on policy decisions that will come in the July meeting. Edits to the statement were mostly in a positive direction. Our colleagues at NAB continue to believe that the 3-year yield curve control will not be extended from the April 2024 bond to the November 2024 bond and QE will probably be extended, but at a slower pace later in the year.
The domestic rates market continued to defy global forces, with rates falling across both the bond and swaps curves. Bond traders have clearly been caught short and the RBNZ’s LSAPs have added to the downward pressure this week, while swap rates are settling lower after further digestion of last week’s MPS. The 10-year NZGB fell 6bps to 1.74%, trading below the level seen prior to the MPS last week. NZDM’s syndication of a new 2032 bond might come as soon as next week, which will add some welcome supply to the market. Swap rates were down 2-4bps across the curve.
On the calendar today, NZ’s Q1 terms of trade are expected to be on the soft, but this lags the recent strength in commodity prices. As noted, Australian Q1 GDP should show further signs of economic recovery, while there are a number of Fed speakers on the wires again overnight.
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